RISK ASSESSMENT

Vigorous growth limited by the size of the market

Growth reached its highest level in ten years in 2017 thanks to growing employment levels and rising real wages, which stimulated domestic demand. Slower momentum in investment and private consumption could reduce growth in 2018. Growth is still broadly dependent on exports and integration in European value chains. The over-indebtedness preceding the 2013 banking crisis will continue to put pressure on this sector, despite gradual restructuring and low interest rates. Robust foreign investment is limited by an ambivalent attitude on the part of the authorities towards the privatisation of state-owned enterprises and cumbersome regulations. Despite everything, investments are expected to increase, thanks to vigorous internal and external demand, especially in the consumer goods and construction industries. They will also be buoyed by European financing in 2018. Like at the European level, inflation is influenced by oil price movements. It will be slightly positive in 2018, thanks to modest underlying pressure on prices and the gradual closing of the output gap.

Public sector restructuring under way

Fiscal restructuring has prompted renewed financial market confidence: Moody’s and S&P have upgraded Slovenia’s credit rating. The fiscal effort will continue in 2018 via new cuts in current spending and welfare spending, taking into account the ageing population. The deficit will continue to narrow thanks also to higher tax receipts and social security contributions, as well as lower interest rates. These efforts already led to a primary budget surplus in 2017. The low rates and the ECB’s monetary easing help reduce the public debt burden, which despite everything remains above the target 60% of GDP. The recovery in growth relied on the restructuring of indebted state-owned enterprises, reform of the banking sector and on attracting foreign investment in a huge privatisation programme. In the financial sector, the banks have been recapitalised and restructured at considerable cost following the banking crisis of 2012-2013. The creation of a bad bank has, since 2016, helped halve the ratio of non-performing loans. However, in order to complete the restructuring of the industrial and banking sectors, of which the State controls about 50% and 44% respectively, privatisation should accelerate: the government had committed to the European Union to sell half its holdings in NLB, Slovenia’s largest bank, but ultimately refused an offer considered to be too low. No further privatisation is expected before the 2018 elections. Almost 54% of the public debt, namely 40% of GDP, is held by foreign creditors and the country continues to be characterised by an external export debt ratio above 120%. However, most of this debt is long-term, is 70% denominated in euros, and corresponds to private commitments.

The current account surplus will remain significant

The economy remains broadly dependent on its impressive trade surplus based on European demand and tourism. 90% of exports, which represent 80% of GDP, go to neighbouring countries. Integration in German and Austrian production chains, thanks to the competitiveness of the automotive, electrical and electronics equipment, pharmaceuticals and domestic appliances sectors is behind half of all exports. In 2018, the current account surplus will continue on a downward trend because of rising imports driven by internal demand and increases in the import bill for basic and intermediate products.

A fragile coalition government

Miro Cerar, founder of the Modern Centre Party in 2014, leads a government based on a fragile coalition but which is expected to survive until the parliamentary elections scheduled in April or May 2018. The fiscal consolidation the government is committed to seems to have rendered the three parties forming the coalition unpopular. This political environment is likely to slow the pace of economic reforms in 2018. However, according to voting intentions figures, a new multi-party coalition is more likely than a single-party government. Persistent income inequalities between the capital and the rest of the country continue to be a central issue in these elections. The political challenges of reforming the public healthcare system and the pension system will continue into 2018. The country enjoys the advantages of being in the EU and in the Eurozone, tokens for fiscal and economic stability at times of political ups and downs.